Review of governance issues for Indonesia
Presentation to Senior Officials from Indonesia’s Coordinating Ministry for
Economic Affairs
Ross H. McLeodIndonesia Project, Australian National University
12 November [email protected]
Main Reference:
Ross McLeod & Andrew MacIntyre (eds) (2007), Indonesia: Democracy and the Promise of Good Governance, Institute of Southeast Asian Studies, Singapore
In particular, chapters 1 & 5:
Ross McLeod & Andrew MacIntyre, ‘Introduction’.
Ron Duncan & Ross McLeod, ‘The State and the Market in Democratic Indonesia’.
Other articles by Ross McLeod:
‘Soeharto’s Indonesia: A Better Class of Corruption’, Agenda, 7 (2), 2000
‘The Struggle to Regain Effective Government Under Democracy in Indonesia’, Bulletin of Indonesian Economic Studies, 41 (3), December 2005.
‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies, 44 (2), August 2008.
The Reform Era in Indonesia
• Widely agreed that much has been achieved post-Soeharto by way of reform in the political/electoral field
• But little has been achieved at the level of the public sector institutions as yet– i.e. bureaucracy, judiciary, military/police,
parliament, state-owned enterprises
• All are still characterised by both endemic corruption and weak performance
The Reform Era in Indonesia
• ‘The high level of corruption under Soeharto still exists, and is arguably even more damaging these days, because it is fragmented, incoherent and no longer under the careful control of a dominant president.’
• This is one reason why economic performance has been weaker during reformasi…
Jun-1994 Jun-1996 Jun-1998 Jun-2000 Jun-2002 Jun-2004 Jun-2006 Jun-2008
15
10
5
0
-5
-10
-15
-20
GDP Growth% p.a.
Soeharto era average growth
Soeharto steps down
The Reform Era in Indonesia
• The performance of governments in terms of delivering social and economic advancement is critical for legitimacy and political survival.
• Prolonged failure to meet minimal public expectations invites the possibility of … the breakdown of democracy ….
• ‘Performance legitimacy’ is essential to the survival of governments, and systems of government—including democracy itself.
Poverty Incidence (% of population below poverty line)
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005 2007 2009
SBY presidency begins
Target range 12-14%
SBY election promise
‘The government is here to help you’(?)
• Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good.
‘The government is here to help you’(?)
• Economic rationale for government (1)• Improving economic efficiency
– Doing what the private sector cannot do– See chapter by Duncan and McLeod
• Dealing with cases of market failure– Public goods (especially legal system)– Externalities (especially environmental
management)– Natural monopolies (including infrastructure)– Exploitation of natural resources
• These are areas where it is possible to make the average citizen better off: aggregate gains exceed aggregate losses
‘The government is here to help you’(?)
• Economic rationale for government (2)• Income redistribution
– In practice, this gets much more emphasis– The payoffs to politicians and bureaucracy are
higher
• If undertaken by private sector, this may be either– Charity, or– Theft, extortion
• If undertaken by public sector, this may be either– To help the poor– To help the powerful (including groups with a lot
of votes)
‘The government is here to help you’(?)
• Economic rationale for government (2)• Income redistribution often doesn’t show up
in the budget– Rather, by intervention in markets
• These are areas where some citizens are made better off at the expense of others—and the gains to gainers are less than losses to the losers– e.g. former monopoly on clove imports (shared
by Salim and Probosutedjo)– e.g. ban on rice imports helps relatively wealthy
farmers at expense of poorer people who own little or no farming land
‘The government is here to help you’(?)
• In reality, government is largely/mainly about theft (income redistribution)– which explains how the Soeharto family
became so wealthy– and why prosecuting Soeharto would have
been a waste of time (theft can be done legally by way of government policies)
– and why the people wanted a new government
‘The government is here to help you’(?)
• The bureaucracy was crucial to the Soeharto system of government, but with a few exceptions … it did far too little to devise policies that would serve the public interest.
• Rather, its function was to implement policies that would benefit companies owned by Soeharto’s cronies and family members, together with a relatively small number of large foreign firms.
• Benefits to the general public were incidental
‘The government is here to help you’(?)
• Government may be there to help only the powerful elite– And there is always a tendency for it to
help the few at the expense of the many (e.g. bailouts for politically connected large companies/banks)
‘The government is here to help you’(?)
• Undoubtedly, a large part of mankind’s material progress may be attributed to the invention of government: a set of mechanisms for collective decision-making and action for the common good.
• At the same time, however, the coercive power of government has very often been used for the benefit of those who exercise that power, rather than the general public they supposedly represent.
Where Does the Balance Lie in Indonesia Now?
• Is government mainly about improving economic efficiency, or redistributing income at the expense of the general public (and efficiency/growth)?
• Let’s look at Ministries under the Coordinating Minister for Economic Affairs…
How many economic ministries really only cater to narrow
interests?
– Finance– Energy & Mineral
Resources– Industry (i.e.
manufacturing)– Trade– Agriculture– Forestry– Transport
– Sea and Fisheries– Labour & Transmigration– Public Works– Communications and
Informatics– Research and Technology– Cooperatives and SMEs– SOEs
How many economic ministries really only cater to narrow
interests?
– Finance– Energy & Mineral
Resources– Forestry– Sea and Fisheries– Communications &
Informatics – Transport– Public Works – Research & Technology
– Labour & Transmigration– Trade – Agriculture– Industry (i.e. manufacturing)– Cooperatives & SMEs– SOEs
Coordinating Government would be Easier if Government were Smaller
• Musyawarah menuju ke mufakat … or maybe not:
• ‘Political frameworks that disperse decision-making power widely tend to suffer from chronic problems of indecisiveness or gridlock: that is, it is very difficult for them to make decisions on major policy questions in a timely fashion, because not all constitutionally empowered actors are in agreement.’
• So: how many parties should be inside the governing coalition?– Trade-off between inclusiveness and decisiveness…
Over-emphasis on Inclusiveness?
Party Support Neutral OppositionGolkar Party (Golkar) 129
United Development Party (PPP) 58
Democratic Party (PD) 57
National Mandate Party (PAN) 53
National Awakening Party (PKB) 52
Justice and Prosperity Party (PKS) 45
Crescent Star Party (PBB) 11
Star Reform Party (PBR) 14
Peace Prosperity Party (PDS) 13Others (7 parties) 9Indonesian Democratic Party of Struggle (PDI-P) 109Total 405 36 109Share of total (550) seats in DPR 73.6% 6.5% 19.8%
Source: Anies R. Baswedan (2007), ‘Indonesian Politics in 2007: The Presidency, Local Elections and the Future of Democracy’, Bulletin of Indonesian Economic Studies, 43 (2)
A Hypothetical, More Effective, Workable Majority?
Party Support Neutral OppositionGolkar Party (Golkar) 129
United Development Party (PPP) 58
Democratic Party (PD) 57
National Mandate Party (PAN) 53
National Awakening Party (PKB) 52
Justice and Prosperity Party (PKS) 45
Crescent Star Party (PBB) 11
Star Reform Party (PBR) 14
Peace Prosperity Party (PDS) 13Others (7 parties) 9Indonesian Democratic Party of Struggle (PDI-P) 109Total 297 144 109Share of total (550) seats in DPR 54.0% 26.2% 19.8%
The principal-agent problem
• Members of large, complex organisations (‘principals’) need to delegate control of operations to managers (‘agents’)
• But managers have incentives to cheat the members to serve their own interests– Including acting to benefit some members at
the expense of others
• To be successful, organisations need to find ways of dealing with this principal-agent problem
• That is what ‘good governance’ is about
The principal-agent problem
• The challenge for society is to design systems of government that will ensure that the interests of society as a whole are promoted effectively, while the conflicting interests of the individuals charged with implementing government are kept in check.
The principal-agent problem• In the public sector, one mechanism of good
governance is regular elections• Bad managers (politicians/agents) can be
replaced by voters (citizens/principals)– Like AGM of shareholders in public companies
• ‘It is this check on managerial incompetence and capricious and arbitrary rule that ultimately favours the implementation of sound economic policies over time.’
• Hence the long-established democracies tend to have high p.c. incomes.
The principal-agent problem
• But there is a second layer of the principal-agent problem:– Public sector officials
(bureaucrats/agents)
• These are very difficult to replace (in Indonesia) if they perform poorly– No large organisation performs well if its
top people perform poorly– Dealing with this institutional weakness
is a key element of meaningful reform
Public sector reform
• Key to Indonesia’s future• Very patchy progress• Military still not funded through the budget• Little reform of the judiciary• In the bureaucracy, focus is on catching
and punishing corrupt officials• But little understanding of root causes of
the problem, which is endemic– Ministry of Finance pilot reform project
Ministry of Finance
• Aim of bureaucratic reform:– to create a civil service whose personnel
are ‘clean’ (non-corrupt), professional and accountable
– and which is efficient and effective in carrying out its functions
• NB: Not just fixing corruption, but also improving performance
Ministry of Finance
• Two main components of this reform effort– improving the way the Department goes
about its business• Organisation structure• Task processes
– improving the way human resources are managed
• The latter is of far greater fundamental importance
Ministry of Finance
• Human resources management– detailed job descriptions for each position– identifying training needs – quantifying surpluses and deficits of skills – grading each position – determining a corresponding structure of
remuneration – developing a system for monitoring
performance and rewarding or penalising individuals accordingly
Ministry of Finance Special Allowances and Basic Salaries (Rp '000/month)
0
10,000
20,000
30,000
40,000
50,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27
Position Grading
Allowance
Salary
Management positions (Echelons V-I)
General staff positions (Levels IA-IVA)
Ministry of Finance
• Human resources management– Opening up vacant positions to
(internal) competition– Reward for good performance is rapid
promotion to high level positions that are very well paid
– Penalty for poor performance is no promotion, hence relatively low pay
Ministry of Finance
• Competition for promotion and promise of high remuneration probably the key features of reform
• But there’s a long way to go…– KPK raid on Tanjung Priok Customs
Office– NB: at request of MOF
Review of governance issues for Indonesia
Ross H. McLeodIndonesia Project
Australian National University12 November 2008
